Dallas Fed president: Break up the biggest banks globally

Bloomberg News

Published 6:30 am, Wednesday, March 3, 2010

Federal Reserve Bank of Dallas President Richard Fisher called for an international pact to break up banks whose collapse would threaten the financial system, a position that goes beyond other Fed officials.

“The disagreeable but sound thing to do” for firms regarded as “too big to fail” would be to “dismantle them over time into institutions that can be prudently managed and regulated across borders,” Fisher said in a speech at the Council on Foreign Relations in New York.

The Obama administration has proposed limiting banks' proprietary trading, while Fed Chairman Ben S. Bernanke is among officials who have called for a law to wind down failing financial firms. Such a move may still confer a “government- sponsored advantage” on the companies, Fisher said.

“Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size,” said Fisher, 60. “If we have to do this unilaterally, we should.”

Fisher, a former fund manager and deputy trade representative who often speaks on international issues, said his views “may be slightly radical.” The Dallas Fed president doesn't play a direct role in talks on financial regulation. The main officials involved in international talks involving major central banks are typically the Fed's chairman and vice chairman and the president of the New York Fed.

Fisher didn't identify firms he would target for breaking up. The largest U.S. bank holding companies include Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Wells Fargo & Co. Those firms are supervised by Fed regional banks based in New York, San Francisco and Richmond, Virginia.

Fisher may find support from central bankers elsewhere. In a proposal immediately ruled out by the U.K. government, Bank of England GovernorMervyn King said in October that investment banks should be separated from operations that take deposits from consumers and manage payment systems. Swiss National Bank Chairman Philipp Hildebrand indicated in June, when he was vice chairman, that officials should be prepared to break up some banks if necessary.

Group of 20 policy makers have focused on drawing up so- called living wills, which would outline how banks and their international operations would be wound down in a crisis.

Fisher's stance aligns him closer to lawmakers including Representative Paul Kanjorski, a Pennsylvania Democrat who last year proposed letting the U.S. dismantle large firms, and Senator Bernard Sanders, a Vermont independent and self-declared socialist, who said in July that “if an institution is too big to fail, the institution is too big to exist.”

Kanjorski's plan was passed by the House in December as part of financial-overhaul legislation. The Senate Banking Committee may soon begin debating its own version of regulatory changes. Its chairman, Connecticut Democrat Christopher Dodd, has said the government should have the power to break apart large firms “as a very last resort.”

In a speech footnote, Fisher said he doesn't speak for anyone else at the central bank, “a disclaimer that is usually readily apparent in my case but is nonetheless de rigueur.”

The 10 largest U.S. banks' share of the industry's assets has increased to 60 percent in 2009 from 44 percent in 2000 and about 25 percent in 1990, Fisher said.

“The existing rules and oversight are not up to the acute regulatory challenge imposed by the biggest banks,” Fisher said. “Because of their deep and wide connections to other banks and financial institutions, a few really big banks can send tidal waves of troubles through the financial system if they falter.”

Fisher, who joined the Dallas Fed as its chief in 2005, told reporters after his speech that interest rates are likely to stay low for an “extended period,” echoing a phrase from Federal Open Market Committee's last statement, because “there's so much slack in the system.”

“I don't see the case right now that we're likely to change our interest-rate regime in terms of the fed funds rate,” he said, referring to the benchmark interest rate for overnight loans among banks. Inflation isn't likely to pose a significant threat for the “foreseeable future.”

In his speech, Fisher echoed comments by other Fed officials who have said the central bank must retain bank- supervision powers to carry out its functions for setting interest rates and serving as the lender of last resort.

Proposals in Congress to strip the Fed of some or all of its regulatory authority are “misguided,” he said. “It is simply impossible to properly evaluate the health of a potentially troubled borrower with information generated by another agency,” Fisher said.

He also reiterated opposition to a proposed law that would open the Fed to audits of interest-rate decisions, saying it would lead to political interference.